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We maintain our Neutral recommendation on Starwood Hotels & Resorts Worldwide Inc. (HOT - Analyst Report), given its strong outlook for the fourth quarter of 2013 and for 2014. However, a volatile economic scenario and lingering uncertainty in various regions keep us on the sidelines.

Why the Reiteration?

Starwood’s top line surpassed the Zacks Consensus Estimate and increased 3.6% year over year driven by increased management fees, franchise fees and other income and solid revenue per available room (RevPAR) growth. The bottom line also beat the consensus mark by 12.7% and was up 6.1% year over year driven by solid revenues and margin expansion.

Moreover, Starwood raised its earnings guidance for 2013. It now expects its adjusted earnings per share in the range of $2.93–$2.95, up from the prior estimates of $2.81–$2.88. The company expects RevPAR for same-store company-operated hotels to increase in the range of 5.0% to 7.0% in 2014 compared to 4.0% to 6.0% in 2013. Driven by the strong results, estimates for 2013 and 2014 largely moved upwards over the past 60 days. The Zacks Consensus Estimate for 2014 has increased 1.7% to $3.02 over the same period.

Starwood is one of the world’s largest hotel and leisure companies that cater to major markets around the world. We believe the strength of Starwood’s brand allows the company to charge a premium price for its hotel rooms. Given its property locations and strong brand recognition, we believe the company is well positioned to benefit from higher market demand on the back of stepped-up business traveling in major North American and international locations.

More than half of Starwood’s properties are situated outside the U.S., which gives the company wide international exposure. Apart from China, Starwood is expanding its presence in India, Japan, Thailand and Oceania. The company also continues to expand opportunistically in high profile destinations such as London, Paris, Barcelona and Milan.

Meanwhile, asset disposition remains another bright spot for the company. Since late 2010, transition to an ‘asset light’ business model has gained momentum in the hotels and REIT industry. Asset sale remains a long-term strategy for greater financial flexibility, which would help the company to grow through management and licensing arrangements instead of direct ownership of real estate. Moreover, in an effort to enhance shareholder value, the company pursues a dividend distribution policy and a share repurchase program.

Despite these positives, we remain concerned due to the lingering uncertainty and volatile economic scenario in various regions. Despite the immense growth potential, a deteriorating political situation and a slowing economy in Brazil have decelerated overall Latin American sales. Currently, Egypt is facing political instability while riots are affecting growth prospects in Nigeria. The company does not expect the situation in Egypt to improve in the near term. The troubles in Egypt and Syria cast a shadow over the performance of the entire African and Middle Eastern region.

Also, management remains skeptical about the recent budget sequestration in the U.S. and believes that the federal actions may be unfavorable for the leisure business. According to management, uncertainty over the new government’s policy in China is a concern.

Other Stocks to Consider

The company presently has a short-term Zacks Rank #3 (Hold). Some better-ranked stocks in the hotel sector include Wyndham Worldwide Corporation (WYN - Analyst Report), Home Inns & Hotels Management Inc. (HMIN - Snapshot Report) and Orient-Express Hotels Ltd. (OEH - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

 

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